AP Microeconomics Unit 5: Factor Markets

Market for inputs of products (factors of production)

In the resource market, firms make up the demand curve and households make up the supply curve

The demand of the factors of production is derived from the demand of the products produced by the factors

- The marginal increase in the the firm's total revenue when an additional unit of the factor is employed
- MRP = change in total revenue/change in factor quantity = (MP produced by factor)(MR)

- The marginal increase the firm's total resource costs when an additional unit of the resource is employed
- MRC = change in total factor cost/change factor quantity

At the last unit of the resource: Marginal revenue product = marginal resource cost

= Marginal factor/resource revenue
- Because at every resource price, firms are only willing to purchase at Q where the factor price (the MRC) = MRP (the profit-maximizing quantity)
- Is downward sloping because as quantity increases, MRP decreases

- = Marginal resource cost
- Because households are willing to supply infinite supply of resources at market wage; is perfectly elastic for a perfectly competitive resource market

1. Changes in product demand (if product demand increases -> price of product increases -> MRP increases at every quantity -> resource demand increases)
2. Changes in productivity of factor (if productivity increases -> MP increases at every quantity -> MRP product increases at every quantity -> resource demand increases)
3. Changes in prices of other resources (substitute factor and complement resource)

A resource that takes place of another resource to produce the same product (e.x. capital and labor): if price of substitute decreases -> MRC of substitute decreases -> Q of substitute increases -> resource demand decreases)

A factor that is commonly used with another factor to produce the same product (e.x. lumber and construction workers: build houses together): if price of complement decreases -> MRC of complement decreases -> Q of complement increases -> factor demand increases)

1. Many firms hiring many workers
2. Workers have similar skills and abilities
3. Firms are wage takers: must pay hired workers the wage set by the market

1. Preferences/social norms/cultural expectations
2. Education and training
3. Availability of alternative options
4. Mobility of workers
5. Working conditions

- Is the same as factor market demand curve: = Marginal resource revenue
- Because at every factor price, firms are only willing to purchase at Q where the factor price (the MRC) = MRP (the profit-maximizing quantity)
- Is downward sloping because as quantity increases, MRP decreases

- Is the same as factor market firm supply curve: = Marginal resource cost = wage
- Because households are willing to supply infinite supply of labor at market wage; is perfectly elastic

Is a type of price floor; effective if above market equilibrium wage; creates a surplus in the labour market (labour supply > labour demand) and lowers the quantity of workers hired

1. Sole employer of a given industry
2. Wage maker: can set wages
3. Have buying power of labour

= Marginal revenue product; downward sloping

= Wages set by the monopsonist firm
- Is the market supply because the monopsonist firm is a wage setter

Lies above the monopsonist firm's supply curve bc to hire an additional worker, the firm has to raise the wages for all previous labour units that could've been obtained at a lower wage (firm can't wage-discriminate)

Set below the MRC curve on the supply curve at the profit-maximizing quantity of factor units (since monopsonist firm is a wage setter, wants to lower wages to lower cost)

Monopsonist firm hires a lower quantity of workers and pays a lower wage than the perfectly competitive firm

At the last unit used of labour and capital, MPL/PL = MPK/PK (where L: labour, K: capital)

- Insufficient job info
- Geographic immobility
- Unions
- Wage Discrimination